Unlike most securities fraud class actions, which get dismissed or settle, this case involving a consumer lending business, was tried. The plaintiffs claimed misrepresentation under Section 10(b) of the Securities Exchange Act and Rule 10b-5. They succeeded spectacularly—the jury awarded them $2.46 billion.

It was no surprise that the defendants challenged the judgment. The case eventually ended up in front of the 7th Circuit Court of Appeals, where the defendants claimed the plaintiffs had failed to prove loss causation. “Proving this element takes sophisticated expert testimony, and the plaintiffs hired one of the best in the field,” the 7th Circuit said at the outset of its analysis.

The expert proposed two economic models to measure the impact of the defendants’ false statements on the stock price—the specific disclosure model and the leakage model. The jury adopted and applied the leakage model, which accounted for the effects of market and industry forces but not for company-specific non-fraud-related factors. But at trial the plaintiffs’ expert explained in general terms that while he found mixed disclosures that contained fraud- and non-fraud-related information, the non-fraud-related information was not in a significant way positive or negative.

In their appeal, the defendants cited a number of cases in which courts had rejected a similar or identical leakage model.

The 7th Circuit found those cases did not apply to the case at hand. There the firm-specific non-fraud-related information was “both clearly identified and significant in proportion to the disclosures.” This was not the case here. The expert’s trial testimony on the issue was “very general,” and “neither side bothered to develop it.” Moreover, the defendants failed to identify any firm-specific nonfraud information that could have meaningfully distorted the model, the 7th Circuit said.

“To our knowledge, no court has either upheld or rejected the use of a leakage model in circumstances similar to this case—probably because these cases rarely make it to trial,” the court continued.

The defendants also proposed that “any loss causation model must itself account for, and perfectly, exclude” any such factors.